Quarterly report pursuant to Section 13 or 15(d)

Equity-Based Compensation

v3.19.2
Equity-Based Compensation
6 Months Ended
Jun. 30, 2019
Equity-Based Compensation  
Equity-Based Compensation

(9)

Equity-Based Compensation

Antero is authorized to grant up to 16,906,500 shares of common stock to employees and directors of the Company under the Antero Resources Corporation Long-Term Incentive Plan (the “Plan”). The Plan allows equity-based compensation awards to be granted in a variety of forms, including stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, dividend equivalent awards, and other types of awards. The terms and conditions of the awards granted are established by the Compensation Committee of Antero’s Board of Directors. A total of 5,753,433 shares were available for future grant under the Plan as of June 30, 2019.

Antero Midstream Partners’ general partner was authorized to grant up to 10,000,000 common units representing limited partner interests in Antero Midstream Partners under the Antero Midstream Partners LP Long-Term Incentive Plan (the “AMP Plan”) to non-employee directors of its general partner and certain officers, employees, and consultants of Antero Midstream Partners and its affiliates (which include Antero). As part of the Transactions, each of the outstanding phantom units in the AMP Plan, whether vested or unvested, were assumed by Antero Midstream Corporation and converted into restricted stock units under the Antero Midstream Corporation Long Term Incentive Plan (the “AMC Plan”) representing a right to receive 1.8926 shares of Antero Midstream Corporation’s Common Stock, par value $0.01 per share (“Antero Midstream Corporation Common Stock”), for each converted phantom unit.

On March 12, 2019, the Board of Antero Midstream Corporation adopted the AMC Plan under which awards may be granted to employees, directors and other service providers of Antero and its affiliates. The AMC Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, other stock-based awards, cash awards and substitute awards.

The Company’s equity-based compensation expense, by type of award, was as follows for the three and six months ended June 30, 2018 and 2019 (in thousands):

Three months ended June 30,

Six months ended June 30,

2018

2019

2018

2019

Restricted stock unit awards

$

10,231

2,624

$

23,675

6,600

Stock options

495

45

976

389

Performance share unit awards

3,490

2,666

6,001

5,628

Antero Midstream Partners phantom unit awards (1)

4,341

949

8,559

2,075

Equity awards issued to directors

514

265

1,016

760

Total expense

$

19,071

6,549

$

40,227

15,452

(1)Antero recognized compensation expense for equity awards granted under both the Plan and the AMP Plan because the awards under the AMP Plan are accounted for as if they are distributed by Antero Midstream Partners to Antero. Antero allocates a portion of equity-based compensation expense related to grants prior to the Transactions to Antero Midstream Partners based on its proportionate share of Antero’s labor costs. Through March 12, 2019, the total amount of equity-based compensation is included in the consolidated financial statements of Antero; and effective March 13, 2019 (date of deconsolidation), the amount allocated to Antero Midstream Partners is no longer reflected in Antero’s consolidated financial statements. See Note 3 to the unaudited condensed consolidated financial statements for further discussion on the Transactions.

Restricted Stock Unit Awards

Restricted stock unit awards vest subject to the satisfaction of service requirements. Expense related to each restricted stock unit award is recognized on a straight-line basis over the requisite service period of the entire award. Forfeitures are accounted for as they occur by reversing the expense previously recognized for awards that were forfeited during the period. The grant date fair values of these awards are determined based on the closing price of the Company’s common stock on the date of the grant.

A summary of restricted stock unit award activity for the six months ended June 30, 2019 is as follows:

Weighted
average

Aggregate

    

Number of
shares

    

grant date
fair value

    

intrinsic value
(in thousands)

Total awarded and unvested—December 31, 2018

 

1,712,485

$

24.57

$

16,080

Granted

 

1,568,617

$

8.69

Vested

 

(674,312)

$

28.04

Forfeited

 

(190,525)

$

18.05

Total awarded and unvested—June 30, 2019

 

2,416,265

$

13.81

$

13,362

Intrinsic values are based on the closing price of the Company’s stock on the referenced dates. As of June 30, 2019, there was $29 million of unamortized equity-based compensation expense related to unvested restricted stock units. That expense is expected to be recognized over a weighted average period of approximately 2.7 years.

Stock Options

Stock options granted under the Plan have a maximum contractual life of 10 years. Expense related to stock options is recognized on a straight-line basis over the requisite service period of the entire award. Forfeitures are accounted for as they occur by reversing the expense previously recognized for awards that were forfeited during the period. Stock options were granted with an exercise price equal to or greater than the market price of the Company’s common stock on the dates of grant.

A summary of stock option activity for the six months ended June 30, 2019 is as follows:

Weighted

Weighted
average

average
remaining

Intrinsic

    

Stock
options

    

exercise
price

    

contractual
life

    

value
(in thousands)

  

Outstanding at December 31, 2018

 

579,617

$

50.55

 

5.81

$

Granted

 

$

Exercised

 

$

Forfeited

 

(46,062)

$

50.00

Expired

 

$

Outstanding at June 30, 2019

 

533,555

$

50.60

 

5.29

$

Vested or expected to vest as of June 30, 2019

 

533,555

$

50.60

 

5.29

$

Exercisable at June 30, 2019

 

533,555

$

50.60

5.29

$

Intrinsic values are based on the exercise price of the options and the closing price of the Company’s stock on the referenced dates.

A Black Scholes option pricing model is used to determine the grant-date fair value of stock options. Expected volatility was derived from the volatility of the historical stock prices of a peer group of similar publicly traded companies’ stock prices as the Company’s common stock had traded for a relatively short period of time at the dates the options were granted. The risk free interest rate was determined using the implied yield available for zero coupon U.S. government issues with a remaining term approximating the expected life of the options. A dividend yield of zero was assumed.

As of June 30, 2019, there was no unamortized equity-based compensation expense because all stock options were fully vested.

Performance Share Unit Awards

Performance Share Unit Awards Based on Stock Price Targets

In 2016, the Company granted performance share unit awards (“PSUs”) to certain of its executive officers that are based on stock price targets. The vesting of these PSUs is conditioned on the closing price of the Company’s common stock achieving specific price thresholds over 10-day periods, subject to the following vesting restrictions: no PSUs may vest before the first anniversary of the grant date; no more than one-third of the PSUs may vest before the second anniversary of the grant date; and no more than two-thirds of the PSUs may vest before the third anniversary of the grant date. Any PSUs which have not vested by the fifth anniversary of the grant date will expire. Expense related to these PSUs is recognized on a graded basis over three years. Forfeitures are accounted for as they occur by reversing the expense previously recognized for awards that were forfeited during the period.

Performance Share Unit Awards Based on Total Shareholder Return (“TSR”)

In 2016 and 2017, the Company granted PSUs to certain of its employees and executive officers that vest based on the TSR of the Company’s common stock relative to the TSR of a peer group of companies over a three-year performance period. The number of shares of common stock which may ultimately be earned ranges from zero to 200% of the PSUs granted. Expense related to these PSUs is recognized on a straight-line basis over three years. Forfeitures are accounted for as they occur by reversing the expense previously recognized for awards that were forfeited during the period.

In 2019, the Company granted PSUs to certain of its employees and executive officers that vest based on the Company’s absolute TSR, with target payout achieved if the price per share of the Company’s common stock reaches 125% of the beginning price (as defined in the award agreement) at the end of a three-year performance period. The number of shares of common stock which may ultimately be earned ranges from zero to 200% of the PSUs granted. Expense related to these PSUs is recognized on a straight-line basis over three years. Forfeitures are accounted for as they occur by reversing the expense previously recognized for awards that were forfeited during the period.

Performance Share Unit Awards Based on TSR and Return on Capital Employed (“ROCE”)

In 2018, the Company granted PSUs to certain of its employees and executive officers, a portion of which vest based on the Company’s absolute TSR, with target payout achieved if the price per share of the Company’s common stock reaches 125% of the beginning price (as defined in the award agreement) at the end of a three-year performance period (“TSR PSUs”). The number of awards actually earned with respect to the TSR PSUs will be subject to further adjustment based on the TSR of the Company’s common stock relative to the TSR of a peer group of companies over the same period. The number of shares of common stock that may ultimately be earned with respect to the TSR PSUs ranges from zero to 200% of the target number of TSR PSUs originally granted. Expense related to the TSR PSUs is recognized on a straight-line basis over three years. Forfeitures are accounted for as they occur by reversing the expense previously recognized for awards that were forfeited during the period.

The other portion of the PSUs granted in 2018 vest based on the Company’s actual ROCE (as defined in the award agreement) over a three-year period as compared to a targeted ROCE (“ROCE PSUs”). The number of shares of common stock that may ultimately be earned with respect to the ROCE PSUs ranges from zero to 200% of the target number of ROCE PSUs originally granted. Expense related to the ROCE PSUs is recognized based on the number of shares of common stock that are expected to be issued at the end of the measurement period, and is reversed if the likelihood of achieving the performance condition decreases.

Summary Information for Performance Share Unit Awards

A summary of PSU activity for the six months ended June 30, 2019 is as follows:

Number of
units

Weighted
average
grant date
fair value

Total awarded and unvested—December 31, 2018

 

1,767,299

$

26.36

Granted

 

1,416,378

$

9.26

Vested

 

(31,944)

$

27.38

Forfeited

 

(342,161)

$

32.72

Total awarded and unvested—June 30, 2019

 

2,809,572

$

16.95

The grant-date fair values of market-based PSUs were determined using Monte Carlo simulations, which use a probabilistic approach for estimating the fair values of the awards. Expected volatilities were derived from the volatility of the historical stock prices of a peer group of similar publicly-traded companies. The risk-free interest rate was determined using the yield available for zero-coupon U.S. government issues with remaining terms corresponding to the service periods of the PSUs. A dividend yield of zero was assumed. The grant-date fair value for the ROCE-based PSUs is based on the closing price of the Company’s common stock on the date of the grant, assuming the achievement of the performance condition.

The following table presents information regarding the weighted average fair values for market-based PSUs granted during the six months ended June 30, 2018 and 2019, and the assumptions used to determine the fair values:

Six months ended June 30,

2018

2019

Dividend yield

%

%

Volatility

41

%

36

%

Risk-free interest rate

2.49

%

2.35

%

Weighted average fair value of awards granted

$

24.85

$

9.26

As of June 30, 2019, there was $26 million of unamortized equity-based compensation expense related to unvested PSUs. That expense is expected to be recognized over a weighted average period of approximately 2.1 years.

Antero Midstream Partners Phantom Unit Awards and Antero Midstream Corporation Restricted Stock Unit Awards

Phantom units granted by Antero Midstream Partners vested subject to the satisfaction of service requirements, upon the completion of which common units in Antero Midstream Partners were delivered to the holder of the phantom units. Phantom units also contained distribution equivalent rights which entitled the holder of vested common units to receive a “catch up” payment equal to common unit distributions paid by Antero Midstream Partners during the vesting period of the phantom unit award. These phantom

units were treated, for accounting purposes, as if Antero Midstream Partners distributed the units to Antero. Antero recognized compensation expense as the units were granted to its employees, and a portion of the expense was allocated to Antero Midstream Partners. Expense related to each phantom unit award was recognized on a straight-line basis over the requisite service period of the entire award. Forfeitures were accounted for as they occurred by reversing the expense previously recognized for awards that were forfeited during the period. The grant date fair values of these awards was determined based on the closing price of Antero Midstream Partners’ common units on the date of grant.

In connection with the closing of the Transactions, the Board of Antero Midstream Corporation adopted the AMC Plan. In accordance with the terms of the Transactions, each of the outstanding units in the AMP Plan, whether vested or unvested, was assumed by Antero Midstream Corporation and converted into restricted stock units under the AMC Plan at 1.8926 shares of Antero Midstream Corporation Common Stock LTIP for each converted phantom unit.

A summary of phantom unit awards activity for the six months ended June 30, 2019 is as follows:

Number of
units

Weighted
average
grant date
fair value

Aggregate
intrinsic value
(in thousands)

Total awarded and unvested—December 31, 2018

 

583,000

$

27.63

$

12,470

Granted

 

5,972

$

23.44

Vested

 

(3,853)

$

32.44

Forfeited

 

(20,338)

$

26.73

AMP Plan Units awarded and unvested—March 12, 2019

564,781

$

27.59

$

13,476

Effect of conversion (1)

 

504,119

$

14.58

Vested

 

(317,651)

$

14.06

Forfeited

 

(18,906)

$

13.86

Total awarded and unvested—June 30, 2019

 

732,343

$

14.82

$

8,393

(1)Effective March 12, 2019, all outstanding units in the AMP Plan, whether vested or unvested, were assumed by Antero Midstream Corporation and converted into restricted stock units under the AMC Plan.

Intrinsic values are based on the closing price of Antero Midstream Corporation’s common units on the referenced dates. As of June 30, 2019, there was $9 million of unamortized equity-based compensation expense related to unvested phantom unit awards. That expense is expected to be recognized over a weighted average period of approximately 2.1 years.